00/01-03

Abstract 00/01-03

Summary of Facts Provided

An attorney's fee agreement states that clients will be billed expenses equal to a flat percentage of the attorney's total hourly billings. The attorney does not separately itemize expenses for computerized legal research, long distance, photocopying, or similar out-of-pocket expenses.

Issues and Conclusions

The issue presented is whether it is ethical for an attorney to include in a fee agreement a charge equal to a flat percentage of the attorney's total hourly billings to compensate for the client's expenses.

If the attorney and the client both agree in advance to this billing arrangement and it is reasonable, an attorney may charge clients a flat percentage of the attorney's total hourly billings to compensate for the client's expenses. Rule 1.5(a) of the Colorado Rules of Professional Conduct states that an attorney's fee must be reasonable. In establishing an attorney-client relationship, the attorney should promptly establish an understanding of how fees will be computed, including an identification of any hourly charges or fixed amounts that will be part of the attorney's fee.

ABA Formal Ethics Opinion 93-379 (1993) addressed the ethical considerations of charging clients for overhead expenses and other out-of-pocket expenses. In that opinion, the American Bar Association was troubled where an attorney submitted a bill to a client that included charges for general office overhead, but stated that such a practice may be reasonable if the client was informed of the attorney's practice of charging for general overhead expenses before receiving a bill. The opinion also concluded that an attorney may pass onto the client reasonable charges for expenses incurred on the client's behalf, such as photocopying and computer research, provided both parties agree in advance to the amount charged. In the absence of an agreement between the parties, a lawyer may charge only the direct cost associated with the service (i.e., the actual cost of making a copy on the photocopier) plus a reasonable allocation of overhead expenses associated with the provision of the service (e.g., the salary of the person operating the photocopier).

Viewing Rule 1.5(a) in conjunction with ABA Formal Ethics Opinion 93-379, an attorney would ultimately be required to demonstrate that the flat percentage basis for computing expenses was reasonable. If the attorney can justify the reasonableness of the charges and the client agrees to this billing arrangement before the attorney begins employment, expenses may be billed as a flat percentage of the attorney's total hourly billings, but the Committee believes the attorney should disclose to the client the types of expenses incurred in the operation of a law practice that will be subsumed within the flat percentage so that the reasonableness of the fee can be justified.